Bankrupt In Paradise : Planet MoneyThe public pension fund of a U.S. territory in the Pacific Ocean recently filed for bankruptcy. If the case is allowed to proceed, it could have major implications for retirees all across the U.S.

The Northern Mariana Islands are about 4,000 miles west of Hawaii. They look like the kind of tropical islands you see in the movies with bright blue water and white sand beaches.

The people who live on the islands are American. The Commonwealth of the Northern Mariana Islands is a U.S. territory. And just like a lot of U.S. states, the commonwealth has a pension plan for its government employees.

Sixto Igisomar used to run it.

"We always say that the CNMI pension plan is the best pension plan within the United States because the benefits were very good, " Sixto says.

They used to say that. Last month, the pension fund became the first public pension fund in the U.S. to seek bankruptcy protection.

How did the fund get into trouble? Part of the problem, according to Igisomar: The benefits were very good.

The pension fund pays benefits to an employee's spouse and children long after the employee has died. Adopted children were included, so many government retirees adopted their own grandchildren so that they could receive benefits.

Ruth Tighe is former employee of the commonwealth's energy office. She says the law that allowed her to retire with so little government service should never have been passed.

"At the time when I retired there was a law on the books that said you only had to work for 3 years, " says Tighe. "And if you worked for the government for 3 years, you could retire and start collecting your pension at age 62."

In the mid 2000's the economy of the islands started to collapse. Large garment factories left the islands and the government's tax revenue started to dwindle. As a result, the government started paying less and less into the pension fund. In 2006 and 2007, the government suspended its payments into the fund.

That left Igisomar in a bind — he couldn't get more money from the government and by law he couldn't change the amount of money he had to give out.

"The pension plan was placed into the constitution. There is no way you can change it. There is no way you can amend it. There is no way you can just stop it, " Igisomar says.

The fund started to consider bankruptcy. In bankruptcy, pension officials would be able able to negotiate with the retirees and try to get them to accept less money.

The case is in front of a judge right now, and a central question in the case has ramifications for states and state employees all across the mainland: Is a pension fund separate from the government or part of it?

Under U.S bankruptcy law, commonwealths and states cannot file for bankruptcy, according to David Skeel, a law professor at the University of Pennsylvania.

The pension fund is arguing that it works for the commonwealth of the Northern Mariana islands but it is not part of it.

"They need to show separateness," says Skeel. "They need to show they are not just a branch of the commonwealth but they really are a separate entity."

Skeel says pension funds all across this country are likely watching this case to see what the court decides.

"If this case ends up concluding that a pension fund can file for bankruptcy, I think we will have some pension funds thinking about it and at least considering taking that plunge, says Skeel.

After all, there are a lot state pension funds that are in facing financial troubles similar to these tiny islands. They have promised a lot to their retirees but it's unclear whether they will be able to keep those promises.